Is this the end of $1 milk at our supermarkets?

THE boss of what will soon be Australia's largest dairy producer has flagged the end of controversial $1-a-litre supermarket milk.

Lino Saputo, chief executive of Canadian milk giant Saputo, which last month announced it was buying troubled dairy co-operative Murray Goulburn for $1.3 billion, says he "doesn't know the economics" of the deals which allow supermarkets including Coles to sell milk for less than the price of bottled water.

"Through this process we will inherit all of the contracts that were signed by MG," Mr Saputo told the ABC. "I don't know the economics of it, to be quite frank with you, because we weren't privy to those contracts for antitrust reasons.

"But we will honour the contracts. When those contracts expire we have to look at the economics of them and then from there we'll see what we need to do moving forward. I don't know the economics of dollar milk.

"We'll have to take a look at that once we get involved in the business. The one thing I can say, though, is that when you look at other food products that are on the shelves, when you can get water at $3-a-litre and perhaps soda at $5-a-litre, for all the energy and effort that farmers are putting into producing milk, I'm not sure that it is the right value."

Saputo has guaranteed it will pay "industry-leading prices" for dairy.

"We know that we will be dairy leaders and it's incumbent on us to be responsible that way," Mr Saputo said.

"That is a long-term guarantee. Part of our advantage is we're able to produce high-quality products at low cost, and as we do that we gain value from being able to sell high-quality solids to customers around the world and domestically.

"We don't give our product away. Our profitability is much higher than the average in the dairy industry, and that affords us the ability to pay leading prices for dairy."

Industry insiders have raised eyebrows at Mr Saputo's comments, highlighting a submission by Warrnambool Cheese & Butter to the Australian Competition and Consumer Commission's dairy industry inquiry last December.

Saputo has owned Warrnambool Cheese & Butter since 2014, and its acquisition of Murray Goulburn is still subject to approval by the ACCC.

"In respect to the retailers pricing of their own branded one-litre packaged milk at $1, this has been as a result of an open, free and competitive market and therefore cannot be held up as failure of the competition environment or, on its own, as a success or failure of the Australian dairy industry," the submission said.

"In our own experience however the margin that can be gained through the retailers' private label business are very tight and in general WCB has not participated in this market for that reason.

"Our understanding is one of the dynamics that has allowed for tight margins is in relation to the private label agreements with the retailers by new entrants in the sector who have invested heavily to build new capacity in retail-packaged products where there was already surplus capacity, and where market demand is generally flat."

Speaking to the ABC, Mr Saputo indicated he was confident the takeover deal would be approved, as the industry had changed in the last three years.

"There have been new entrants in the dairy space and some of our competition have put on new capacity," he said. "The truth of the matter is that suppliers do have other options for home for their milk. You can see that by Murray Goulburn going from 3.5 billion litres of milk in their heyday to 1.9 billion litres."

Mr Saputo, who is currently in Australia wooing farmer-shareholders ahead of a vote on the takeover bid, said the first and most important priority if the deal goes ahead would be to get 600 million litres of milk back to get the factories running at higher capacity.

"Some of the plants are running at 40-50 per cent capacity," he said. "I've got great confidence we can get there, speaking to people in the field here and speaking to suppliers who have friends who left the Murray Goulburn system. I believe there is at least 600 million litres of milk waiting on the sidelines for this saga to resolve itself."

A spokesman for Coles declined to comment on Mr Saputo's comments as the Murray Goulburn takeover was still subject to shareholder and regulatory approval. A Woolworths spokeswoman also declined to comment.

Earlier this month, outgoing Wesfarmers boss Richard Goyder said he had "no issue" with $1-a-litre milk, saying Coles' suppliers were subsequently paid more and money went back to farmers.

Speaking at the National Press Club, Mr Goyder said the cost of milk mattered to the "people we're servicing". "If you went outside now and asked people, 'Would you buy $1 milk or $1.20 if 20 cents went back to the dairy farmers?', 100 per cent of them will tell you, 'No, I'll buy it at $1.20'," he said. "I'll tell you, when they go to the supermarket, they buy the $1 [milk].

"At the end of the day I don't have an issue with what we did [on $1 milk] because ... subsequently we paid the processors who supply us with milk more. And we also brought in, in most states, farmers' milk - we try to give that money back to farmers."

Widespread media coverage of struggling dairy farmers, many of whom were Murray Goulburn suppliers, last year led to a boycott of cheap supermarket milk.

The reality is slightly more complicated than simply blaming the supermarkets, however. Home brand milk sold at Coles and Woolworths only makes up about 6.5 per cent of domestic production - the vast majority is sold either as fresh or milk solids on the global market, where prices have collapsed in recent years.